Wednesday 22 October 2014

When the vulture funds move on, our broken banks will be right back where they started

Published 20/08/2014 | 00:00

Michael O'Flynn

The Irish crisis happened because our banks were massively leveraged to over-expensive Irish property. That's it. We all know the story. Everything that happened afterwards was the consequence of this banking idiocy, not the cause of the country's economic plight. How unforgiveable would it be if this crisis ended with the Irish banks once again leveraged to expensive Irish property?

We are in the process of heading this way and this lamentable upshot could be the unintended consequences of NAMA's "success" in selling off its property portfolio to foreigners. The dynamic of foreign funds buying up Irish property at deep, deep discounts, only to sell the same assets on in a few years at a significant profit, is the Hibernian piece in a global jigsaw which is seeing the very rich get even richer.

To misquote Doctor Spock, "it's capitalism Jim, but not as we know it". This development is not vibrant capitalism, based on fair competition. It is plutocracy, based on almost monopoly access to capital and it threatens all of us.

Here is what is happening. The US, UK and Japanese central banks are operating a policy of printing money. However, due to the fact that the banks are being given the job of distributing this cheap money to the economy, the efficacy of this policy is based on the decisions of the boards of the large banks - the very people who caused the problems in the first place!

The money isn't finding its way into the hands of the people, but is staying in the big banks and being lent to smaller outfits which are placing bets on everything from stocks, to coffee and real estate.

In many cases these institutions are from the same banking gene pool, with lots of successful bankers having jumped ship to set up the funds.

Now here is a twist. Because interest rates are at an all-time low, rich savers who were happy to live off the odd bit of interest on their savings now want to get better yields.

Therefore, they are knocking on the door of these private funds, looking to get more from their money than they can on deposit.

The funds now having promised the wealthy better returns have got to deliver. So they need to find cheap assets. This the nub of investing and they are perfectly entitled to do so. In fact, they are mandated to do so by their shareholders.

They are following the maxim of their favourite value investor Warren Buffet who cautioned buyers: "Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results"

The implication for the rest of us are not so sanguine because foreign funds are not the natural owners of Irish property assets. The natural owners of Irish property assets are Irish people.

Therefore, the question is not "Who is buying Ireland", as an RTE documentary gushed last year, but who will buy Ireland back from those guys? And at what price?

The strategy of a fund, is termed in the business "three and thirty". This means they buy and hold for three years and when they have achieved a 30pc profit, they sell and they are gone to the next "distressed" country. The accumulation of wealth in this case in the hands a very few people is obscene.

However the question is who pays for their extravagant returns.

This is where it gets tricky for Ireland because when the opportunity passes for significant double-digit returns, why would a property fund sniff around here?

Against this background, is it any wonder the foreign private equity funds have been impressed with NAMA and at every opportunity are praising NAMA? NAMA is making them very rich and by selling quickly to highest bidder now, it will ensure that the Irish credit crunch only chokes the Irish and precludes the Irish from partaking in the Irish recovery!

The figures are extraordinary. One foreign fund, which received much attention at the end of 2013, is Kennedy Wilson - a US owned international fund managing $13.7bn in assets. It was estimated that some 15pc of its global investment is in Ireland. I'm sure they'll be happy to divest.

However, they are not alone. US investment group Starwood Capital bought €200m of loans, which had a face value of €810m, indicating that the new owners bought the portfolio for 25 cent in the euro.

On April 4 of this year, NAMA announced the completion of the sale of its Project Eagle portfolio of loans, a Northern Irish debt portfolio. The sale of the portfolio, which has a par value of £4.5bn and represents the largest single transaction by NAMA to date, to US private equity fund Cerberus Capital Management relates to loans secured on assets in Northern Ireland and in other locations where the underlying properties are owned by Northern Ireland-based debtors.

The fifth-largest private equity firm in the world, Blackstone has bought about €2bn of Irish loans and property. It is better known in the headlines as the preferential owners of €1.8bn par value of loans linked to developer Michael O'Flynn, which Blackstone bought from NAMA at a discount for around €1.1bn.

What happens when a bust in Sydney or Calgary attracts these funds?

They will sell to Irish investors.

Where will the Irish get the cash?

Why they'll borrow it from Irish banks and we will be back to where we started with Irish banks overleveraged to expensive Irish property.

You couldn't make it up!

Irish Independent

Read More

Don't Miss

Editor's Choice